Public Procurement Transparency and its Potential to Reduce Corruption in Low-Income Countries

Introduction

Public procurement is the process when public authorities, such as government departments or local authorities, purchase goods, services, or works from companies. It constitutes a significant portion of a nation's expenditure. More importantly, this behind-the-scenes powerhouse of nations isn’t just about bureaucratic transactions – it’s a financial force that fuels economic growth or veers it off course. The World Bank estimates that approximately US $9.5 trillion is spent annually on public procurement, which accounts for 15-22 percent of the GDP in many developing countries. This isn’t just a financial statistic; it’s a reflection of how countries allocate resources, foster development, and combat corruption. Hence, the direct impact of public procurement on economic stability and development is vast. When tax revenue and donor funds are spent transparently and with a clear purpose, countries experience a reduction in corruption, which is imperative for the socio-economic upliftment of low-income countries. Rwanda and Georgia, for example, witnessed economic growth and reduced corruption levels after implementing policies that made the procurement process transparent. At the same time, Afghanistan and Tanzania's poor public procurement practices negatively impacted their economies. Public procurement isn’t just a process – it’s the heartbeat of nations, influencing the very fabric of their socio-economic landscapes.

The Importance of Reducing Corruption in Low-Income Countries

Corruption poses a significant barrier to economic growth, as it deters foreign and local investors. This malpractice not only hampers financial progress but also results in social disparities. Funds often get misappropriated, depriving citizens of essential services. Corrupt practices erode public trust, setting the stage for political instability and potential civil unrest. An example of this was the Brazil - Operation Car Wash (Lava Jato)  corruption scandal, where the state-owned oil company Petrobras was involved in bribery with high-ranking politicians, including former presidents and business leaders. The process significantly damaged the public's trust in the political establishment. The scandal led to widespread protests demanding accountability and reforms.

Why Transparent Procurement Matters

Officials are responsible for their choices, ensuring they act in the public's best interest. An open and transparent way of procurement is paramount for any governmental framework. Allowing the public to see how responsible governmental officials are making decisions. It promotes fair competition by providing all suppliers with an equal opportunity. Non-competitive approaches often result in poor-quality goods and services. Transparency in procurement processes holds officials accountable for their decisions, allowing the public and oversight bodies to scrutinize procurement activities and ensure they align with the public's best interest.

Practical Examples

The lack of standardized procurement procedures and inconsistent standards can lead to inefficiencies, misappropriation of funds, and corruption. It creates a perfect ground for unscrupulous practices, such as overpricing, favoritism, and fraud, which, in turn, diminishes the already scarce resources. Low-income countries rely significantly on foreign aid, direct investments, and trade deals to bolster their economies. However, many such nations face challenges in procurement due to inconsistent standards and irregular processes. Billions can be wasted on overpriced contracts or embezzled in non-existent projects. A lack of transparency can harm a country's reputation, discouraging future investments and aid. Improving procurement transparency is crucial for long-term economic stability and building international trust.

Tanzania

One example of misuse of funds is the case of Tanzania, where the country's IPTL Power Project has been embroiled in accusations of overpricing and bribery. The lack of a transparent procurement process likely enabled this failure. The Independent Power Tanzania Ltd (IPTL) was contracted as an independent power producer in response to an electricity shortage, but numerous controversies over the years have marred the project​​. One significant issue arose when the International Centre for Settlement of Investment Disputes (ICSID) assessed the real cost of the IPTL project at US$127.2 million, contrasting with the original figure of US$150.7 million​​.

 Moreover, there were claims against IPTL for overpricing the facility and its services when the power plant failed to produce electricity despite receiving a loan of USD 105 million for the project, which became the burden of Tanzanian taxpayers. The situation escalated to the point where key individuals associated with IPTL faced charges of economic sabotage, forgery, and causing financial loss to the government​. Transparent procurement and proper financial management could have prevented this issue.

Afghanistan

When the corruption level is high in the country, resources that could be used to develop infrastructure, improve healthcare, and enhance education are often misused, leading to a vicious cycle of poverty and underdevelopment, as we see in the case of Afghanistan. The misappropriation and wastage of funds are associated with the country's massive influx of foreign aid over the past two decades. John Sopko, the inspector-general for Afghanistan reconstruction, pointed out the lack of proper oversight and a willingness to work with corrupt individuals as contributing factors to the problem. The mismanagement of funds has been such a critical issue that respected organizations like the United Nations (UN) and The United States Agency for International Development (USAID), along with the Special Inspector General for Afghan Reconstruction (SIGAR), have expressed concerns about the potential for a "Tsunami of hunger" and widespread famine in Afghanistan due to the misallocation of resources​. There have been efforts to improve procurement practices through training programs for Afghan officials, although the effectiveness of such initiatives in a fragile country setting remains challenging​​. 

Georgia & Rwanda

Apart from the failed examples, there are also successful examples of Georgia and Rwanda. These two countries, with the reforms implemented in the field of procurement transparency, reduced the probability of corruption considerably.

Rwanda became the first African country to implement an electronic government procurement system (e-GP) nationally, which significantly enhanced transparency and helped reduce corruption in the public procurement process​. In 2007, Rwanda started improving its buying processes by passing a new law and creating a special authority for governmental procurement. Officials even went to South Korea to learn from their advanced digital system. In 2013, with the World Bank's help, the Rwandan government started a feasibility study on implementing the Government Procurement system. They found several challenges, such as rigid business registration and poor record keeping. To fix these issues, Rwanda created a digital system called UMUCYO, meaning "Transparency." With financial and technical support from the World Bank, this platform streamlined business registrations, improved record-keeping mechanisms and facilitated more transparent and accountable transactions. According to the Director General of Rwanda Public Procurement Authority, the e-procurement system in Rwanda has resulted in more efficient transactions, ensuring compliance, transparency, competition, fairness, and better record-keeping​.

Georgia is another success story in establishing a public procurement system. Following the Rose Revolution in 2003, the country implemented comprehensive reforms to combat systemic corruption, especially in the public procurement sector.

One significant move towards this goal was the enactment of the 2010 domestic Public Procurement Laws, which played a pivotal role in transforming the public procurement landscape in Georgia. These laws facilitated the establishment of advanced tendering systems and model electronic procurement platforms to bring transparency, fairness, and efficiency to the procurement process​. A crucial component of these reforms was the transition from paper-based procurement to an electronic procurement system, the Georgian Electronic Government Procurement (Ge-GP) system. This transition was executed under the newly established State Procurement Agency with the aid of the National Agency of Public Registry. The introduction of the Ge-GP system significantly enhanced transparency and reduced discrimination in the procurement process, which in turn minimized corruption risks. The system fostered a more competitive procurement environment, promoting fair competition among bidders. The success story of the Georgian e-procurement system serves as an inspiration for other nations working towards public procurement reform.

The cases of Rwanda and Georgia underscore a fundamental reality: transparent public procurement is more than just a financial or administrative task—it ensures institutional credibility, increases economic efficiency, and deters corruption. For low-income countries grappling with developmental challenges, transparent procurement can significantly augment limited resources and drive the broader agenda of sustainable growth and governance.

Policy Recommendations

Institutionalize E-Procurement

 E-procurement can substantially reduce paperwork, shorten procurement cycles, and provide real-time data for better decision-making.

Rwanda set a precedent by developing the UMUCYO e-procurement system with the help of the World Bank, becoming the first African country to do so. This digital system serves as a model for streamlining procurement processes, ensuring transparency, and promoting efficiency.

E-procurement can substantially reduce paperwork, shorten procurement cycles, and provide real-time data for better decision-making.

Strengthen Oversight and Monitoring

Oversight bodies must ensure that procurement processes are transparent and adhere to the set regulations.

The case of Georgia's e-procurement transparency illustrates how digital platforms can aid in monitoring and ensuring compliance. Effective oversight and monitoring can deter and detect corruption, ensuring that procurement processes deliver value for money. It is also essential for the country to have a robust Anti-Corruption Strategy and implementation to strengthen the oversight of how taxpayer money is spent.

Blockchain technology in public procurement

Incorporating blockchain technology into governmental procurement can provide transparency, traceability, and security, enabling real-time tracking of products and independent confirmation of transactions without third-party intermediaries, which can significantly bolster oversight and monitoring while procuring goods, services, or works.

Capacity Building

It is crucial to equip individuals involved in procurement with the necessary skills and knowledge. Training programs and workshops should be conducted to enhance their understanding and capability. Capacity building ensures that the procurement personnel can effectively manage the procurement processes, ensuring compliance and efficiency.

Public Engagement

Engaging the public in procurement processes can enhance transparency and accountability. Public disclosure of procurement information and encouraging public participation can be beneficial. Public engagement helps identify irregularities and ensure that the procurement processes serve the public interest.

Harmonize with International Standards

Aligning procurement processes with international standards can promote best practices and ensure consistency. This can be achieved by referencing standards set by global bodies like the OECD or The WTO's Government Procurement Agreement (GPA) and the World Bank’s Global Procurement Partnership for Sustainable Development. Harmonization with international standards can foster a conducive environment for local and international bidders, ease the procedures, promote competition, and ensure quality.

Periodic Reviews and Reforms

It is essential to continually assess and update procurement policies to keep pace with evolving best practices and legal frameworks. Lessons can be drawn from past procurement issues like those faced by Afghanistan and Tanzania, and reforms can be implemented accordingly. Periodic reviews and reforms can help to identify and rectify shortcomings in the procurement system, ensuring it remains efficient, transparent, and accountable.

Conclusion

In summary, these policy recommendations aren’t just a roadmap – they’re a bold declaration for a transformative yet attainable leap in the realm of public procurement. They aim at fostering a more transparent, efficient, and accountable procurement system, which is crucial for ensuring the effective use of public resources and promoting public trust in government procurement processes. Through the integration of modern technologies like e-procurement systems and blockchain, along with the institutionalization of robust oversight, capacity building, public engagement, harmonization with international standards, and periodic reviews, countries can significantly improve their procurement practices.

By addressing public procurement with the gravity it deserves, low-income countries can ensure judicious use of public funds and lay a foundational stone for a governance structure that champions transparency, accountability, and, ultimately, the welfare of its citizens.